DURABILITY + DESIGN BLOG

In today’s market, many contractors assume that there are no longer opportunities to sell value.

Certainly, some customers remain price-conscious to the exclusion of all else. However, there are still customers out there with other priorities of equal importance and in niches where price sensitivity is low.

The wise contractor will seek out opportunities to work for clients for whom price is not the decisive factor.

Customer Selection

Not long ago, FMI had the opportunity to sit down for a few hours with the chief of operations for a large institutional owner in the Northeast.

Clients in niche markets, such as luxury homebuilding, may care little about price. Their priorities lie elsewhere.

This owner is widely considered a thought leader in his market sector and a desirable target for many general and specialty contractors, with a large annual capital budget and multiple prestige projects.

Most of the discussion involved how the organization selects contractors decisions and the role that price plays in those decisions.

The 4 Ps

The decision matrix discussed could be called “The Four Ps.” People, Process and Previous experience were all at least as important as Price in this organization’s calculations.

People: While the strength and reputation of an individual firm are certainly important, so are the individuals within that firm.

“You have to be a good firm and give us your A-players,” we heard.

Process: Standard processes increase the predictability of the project's results; thus, these processes are nearly as important as the project team.

Preconstruction processes are especially important, since they allow for early cost and schedule certainty. For example, good scheduling in preconstruction can identify times when construction will interfere with campus operations.

Make sure your entire team is, and appears, top notch and unquestionably up to the task. “You have to be a good firm, and give us your A-players,” said one owner.

Previous experience: This provides an additional layer of confidence that the project team can handle any issues that arise.

As many project owners will tell you, a predictable final price is worth more than a low initial price. Therefore, the more you can demonstrate a higher degree of pricing certainty than other bidders, the better you will separate yourself from the pack.

Ultimately, the non-price criteria proved at least as important as price for this owner. In fact, contractors who had better processes, people and previous experience were invariably selected over competitors with a lower price.

That means contractors with better attributes were able to demand and receive higher margins than their less-qualified competitors.

Differentiation: Not Just for Airlines

Not all customers will have this approach to pricing, so a differentiation strategy is required.

The traditional model for sophisticated price differentiation is the airline industry. Airlines have long differentiated between price-conscious leisure travelers, who tend to book far in advance, and less price-sensitive business travelers, who tend to book much closer to their travel date.

To maximize the revenue per seat, airlines change their prices for a seat, depending on how near the travel date is.

To maximize profitability, contractors must segment customers in much the same way.

Some clients, such as municipal owners, tend to be more interested in the first cost of a project. In addressing these clients, identify ways to keep initial costs low, and look for opportunities to improve position through alternates and value engineering.

Other customers value responsiveness and are willing to pay a premium for it. These clients include water treatment plants, manufacturing facilities, refineries and other facilities that incur heavy costs for downtime.

A third set of customers might be described as price-insensitive. For them, price is not the first, second or even third concern.

Such projects can demand more subcontractors, engineers and design involvement than many nonresidential projects.

Learn your prospect's priorities. Many facility owners will pay more for a quick, reliable turnaround and minimal downtime.

A great example can be found in the super-luxury residential market, where single-family homes can sell for north of $20 million and take more than two years to build.

For these clients, a trusting relationship with the contractor, a maniacal commitment to quality, and a willingness to maximize the enjoyment of the construction experience all matter much more than the project's cost.

Sizing Up Your Prospect

Perceptive contractors should look for clues during the pursuit phase that a client has bigger concerns than cost.

Try asking leading questions:

When you have built previously, what did you enjoy about the process? What parts of the experience were less pleasant?

How involved do you like to be in the construction process? How can we best keep you informed?

Imagine that we have just finished your project. Looking back, what do you wish we had done differently?

Master Management

As with so much else in the construction business, the ability to price for value depends directly on the relationships with the customer.

Firms that have mastered the art of customer management will be able to demand higher margins based on a better understanding of what their customers value.

Providing more value than the competition allows for pricing differentiation—even in today’s tighter construction market.

About the Author

Mike Clancy is a principal with FMI Corporation.

He helps companies nationwide leverage their unique resources and capabilities to build competitive advantage. Email Mike, or call him at 919.785.9299.

ABOUT THE BLOGGER

FMI

“Building Success” is written by professionals at FMI, the world’s largest provider of management consulting, investment banking, and research for the engineering and construction industry. FMI serves contractors, building materials and equipment producers,architects and engineers,owners and developers,and others across the industry. Author information is available at the bottom of each blog entry.

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